Taxable account with advisor, able to gradually sell and reinvest?

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Topic Author
Sahara
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Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

Helping another friend - I want to make sure she’s seeing the LTCG tax interdependencies correctly.

Emergency Fund YES
Debt $3,000 in Credit Card Debt. This will be paid by October
Mortgage 80,000 @ 3.45 Adding $500 per month to the principal once the CC is paid off

S
Tax bracket 10% State 4%
Age 63

Monthly expenses $3,000

Current Income
SSDI $1,000 per month
Annuity from settlement $1,700 per month - not subject to income tax
Withdrawal of $1,000 per month from taxable account

Investments

Traditional IRA It’s unclear whether this account has an AUM fee
$16,000
ABAUX Columbia Capital Allocation Moderate Portfolio ER .94

Taxable It’s unclear whether this account has an AUM fee
$400,000
ABAUX Columbia Capital Allocation Moderate Portfolio ER .94
Cost basis $220,000
Annual ordinary dividends @ $8,000

Plan
1. Primary goal is to increase the monthly withdrawal from taxable to $1,500 monthly until the house is paid off and not incur income tax or risk running out of money. Is this reasonable?
2. Secondary goal is to maybe withdraw the maximum amount from taxable that doesn’t incur LTCG tax and reinvest in something more tax efficient. How much can she withdraw annually and not pay tax on LTCG? Would there be a benefit to moving away from this investment and maintaining a 50/50 allocation? The goal would be twofold - decrease the ER and decrease the ordinary dividends. Is there a balanced/asset allocation fund that she could use in a taxable account? The idea might be to sell annually to the top of the zero % capital gains bracket.
It’s unclear whether this account has an AUM fee.
3. To move away from this investment in the IRA would be easy. I guess she could withdraw from there tax free to a point as well.

Thanks in advance!
dbr
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by dbr »

The safest way to test how much income can be incurred without paying capital gains tax is to sit down with the tax forms and start putting in numbers to see what comes out. The problem is that there are a lot of moving parts all specific to each individual situation and if it matters it is better not to guess. There may also be state taxes to consider.

I usually just start a new case in TurboTax on my computer while checking that there is not a big change from this year to next year. Someone may suggest a free program for best working up 2021 taxes. There are also future years and tax code and break points do change.
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Sahara wrote: Sat Jun 12, 2021 7:14 am How much can she withdraw annually and not pay tax on LTCG?
Here's a start. However, I agree with dbr that this should be estimated using tax software, starting with the 2020 return and comparing to 2021 income if there are no big changes.

She needs to keep her taxable income under $40,400 in order to stay in the 0% LTCG tax bracket. That would be line 15 of the 2020 1040 form. Might be different on the senior form. Adding the standard deduction to that, her total income would need to be under $52,950. These are 2021 numbers.

SSID is $12k taxable (I assume) and ordinary dividends are $8,000. This leaves about $32,950 in space available for tax free long term capital gains if all of the ordinary dividends are non-qualified (which they probably are not). The $1,000 (or $1,500) she is taking from taxable would be part of that $32,950.

One thing to track down is how much of the ordinary dividends are taxable (non-qualified) and how much are qualified. Qualified dividends are taxed like long term capital gains.

About this fund. Columbia Threadneedle's parent company is Ameriprise. It has a front end load and I think there is a high probability it is in an account managed by an Ameriprise advisor who is charging an AUM fee. However, I could be jumping to conclusions - it might be possible she has managed to buy this on the open market with no advisor. I just don't know.

If is is at Ameriprise or similar, you might look for a place (Schwab?) she can transfer and hold this fund with no advisor and no AUM. That would be an improvement. Getting rid of it - all at once or over time - is and even better solution.

It appears that she has enough money as long as expenses do not go up greatly. She will have more if she can get rid of that fund and the advisor I think she is paying. It seems you are attacking the right things - credit card debt first, reduce mortgage second, and considering what to do with those high cost accounts.
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Sahara
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

retiredjg wrote: Sat Jun 12, 2021 8:54 am
Sahara wrote: Sat Jun 12, 2021 7:14 am How much can she withdraw annually and not pay tax on LTCG?
Here's a start. However, I agree with dbr that this should be estimated using tax software, starting with the 2020 return and comparing to 2021 income if there are no big changes.

She needs to keep her taxable income under $40,400 in order to stay in the 0% LTCG tax bracket. That would be line 15 of the 2020 1040 form. Might be different on the senior form. Adding the standard deduction to that, her total income would need to be under $52,950. These are 2021 numbers.

Got it, that's what I was looking for.

SSID is $12k taxable (I assume) and ordinary dividends are $8,000. This leaves about $32,950 in space available for tax free long term capital gains if all of the ordinary dividends are non-qualified (which they probably are not). The $1,000 (or $1,500) she is taking from taxable would be part of that $32,950.

One thing to track down is how much of the ordinary dividends are taxable (non-qualified) and how much are qualified. Qualified dividends are taxed like long term capital gains.

Yes, in 2020 $8,000 were ordinary. :?

About this fund. Columbia Threadneedle's parent company is Ameriprise. It has a front end load and I think there is a high probability it is in an account managed by an Ameriprise advisor who is charging an AUM fee. However, I could be jumping to conclusions - it might be possible she has managed to buy this on the open market with no advisor. I just don't know.

If is is at Ameriprise or similar, you might look for a place (Schwab?) she can transfer and hold this fund with no advisor and no AUM. That would be an improvement. Getting rid of it - all at once or over time - is and even better solution.

Yes, she says she had a "guy" who wanted $600 every time she wanted to talk to him. Now she has a "gal" she calls. The 12/32/20 statement does not indicate an AUM fee. I walked her through the Class A fee she paid on initially purchasing these shares. Apparently, the "gal" justified a 1% expense as the back-office costs of sending her reports etc. We calculated the annual cost with the .94 ER and with a 1.0 AUM fee PLUS a .94 ER and also discussed the lack of tax efficiency. I suggested she call her "gal" and politely inquire as to the AUM fee. I mentioned that providers such as Schwab, Fidelity and Vanguard are happy to send investors reports without charging them 1% but they will also be happy to provide advice for a fee and that should be considered when communicating with them. We talked a little about the in kind transfer process.

It appears that she has enough money as long as expenses do not go up greatly. She will have more if she can get rid of that fund and the advisor I think she is paying. It seems you are attacking the right things - credit card debt first, reduce mortgage second, and considering what to do with those high cost accounts.

I'm glad it looks that way to you as well. I appreciate your time and feedback.
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Sahara wrote: Sat Jun 12, 2021 11:02 am Yes, in 2020 $8,000 were ordinary. :?
I think you are misunderstanding what ordinary dividends are. Qualified dividends - they kind that are taxed like long term capital gains - are a sub-set of ordinary dividends. So ordinary dividends include both qualified dividends and dividends that are not qualified.

You could see the amount of each if you have access to her 1099 or her 2020 tax return.

On the 1040, Line 3a is qualified dividends. Line 3b is ordinary dividends (which includes the qualified dividends).

All of the dividends are included in total income, AGI, and taxable income but they are not all taxed the same. The amount on line 3a is taxed like long term capital gains. The rest of the dividends are taxed like ordinary income.
Topic Author
Sahara
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

retiredjg wrote: Sat Jun 12, 2021 12:48 pm
Sahara wrote: Sat Jun 12, 2021 11:02 am Yes, in 2020 $8,000 were ordinary. :?
I think you are misunderstanding what ordinary dividends are. Qualified dividends - they kind that are taxed like long term capital gains - are a sub-set of ordinary dividends. So ordinary dividends include both qualified dividends and dividends that are not qualified.

Yes I am. I wonder if I will ever understand taxable accounts.
You could see the amount of each if you have access to her 1099 or her 2020 tax return.

On the 1040, Line 3a is qualified dividends. Line 3b is ordinary dividends (which includes the qualified dividends).

All of the dividends are included in total income, AGI, and taxable income but they are not all taxed the same. The amount on line 3a is taxed like long term capital gains. The rest of the dividends are taxed like ordinary income.
Thanks again. I think the $8000 was the amount on line 3b. I am going to take note of this explanation. It occurred to me that my friend tithes $300 to her church each month. Might donating appreciated shares instead be a good strategy for her?
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Donating appreciated shares could be an idea if she is willing to do it and if the church has a way to accept the appreciated shares. If it is a small church, that might not be easy.

https://www.bogleheads.org/wiki/Donatin ... securities


Setting up a donor advised fund might work too, but that depends partially on where the money is actually housed. For example, if the "gal" is at Ameriprise, do they even have a donor advised fund and if yes, what are the fees?

https://www.bogleheads.org/wiki/Donor_advised_fund
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Sahara wrote: Sat Jun 12, 2021 10:18 pm Thanks again. I think the $8000 was the amount on line 3b.
Probably. Some of that probably got the 0% tax rate and some probably got the 10% ordinary rate.
RyeBourbon
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by RyeBourbon »

Keep in mind that the 32K "space" in LTCG bracket is not how much that can be withdrawn/sold each year, rather that's the gain. For example, she could sell 80k of the high ER fund with a basis of 48k. Withdraw the needed 18k and invest the remaining 62k in low ER index funds at an appropriate AA. Repeat each year until you're out of the high ER fund.
Retired June 2023. AA = 55/35/10
Topic Author
Sahara
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

retiredjg wrote: Sun Jun 13, 2021 6:56 am
Sahara wrote: Sat Jun 12, 2021 10:18 pm Thanks again. I think the $8000 was the amount on line 3b.
Probably. Some of that probably got the 0% tax rate and some probably got the 10% ordinary rate.
Just to verify. Unlike Line 2b, 4b, 5b and 6b which split out taxable amounts, the amount on Line 3b is the sum of the amount taxed at your ordinary income rate (the ordinary dividends minus the qualified dividends) and the amount taxed at the LTCG rate <which may be zero>?

I do understand that the tax is computed on the Qualified Dividends and Capital Gain Tax Worksheet.

Wow, no wonder people are confused.
Topic Author
Sahara
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

RyeBourbon wrote: Sun Jun 13, 2021 7:07 am Keep in mind that the 32K "space" in LTCG bracket is not how much that can be withdrawn/sold each year, rather that's the gain. For example, she could sell 80k of the high ER fund with a basis of 48k. Withdraw the needed 18k and invest the remaining 62k in low ER index funds at an appropriate AA. Repeat each year until you're out of the high ER fund.
Yes. I think this is over her head. Maybe PAS could help her with this at a low cost. The cost basis is about 50% so it could take 5 or more years.
Topic Author
Sahara
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by Sahara »

retiredjg wrote: Sun Jun 13, 2021 6:55 am Donating appreciated shares could be an idea if she is willing to do it and if the church has a way to accept the appreciated shares. If it is a small church, that might not be easy.

https://www.bogleheads.org/wiki/Donatin ... securities

Setting up a donor advised fund might work too, but that depends partially on where the money is actually housed. For example, if the "gal" is at Ameriprise, do they even have a donor advised fund and if yes, what are the fees?

https://www.bogleheads.org/wiki/Donor_advised_fund
Right. I'm going to share this down the line. Since she is not paying taxes on the withdrawals at this point and also addressing some basic personal bookkeeping and budgeting items, I don't want to overload her.

Thanks again for being so thorough.
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Sahara wrote: Sun Jun 13, 2021 7:40 am
retiredjg wrote: Sun Jun 13, 2021 6:56 am
Sahara wrote: Sat Jun 12, 2021 10:18 pm Thanks again. I think the $8000 was the amount on line 3b.
Probably. Some of that probably got the 0% tax rate and some probably got the 10% ordinary rate.
Just to verify. Unlike Line 2b, 4b, 5b and 6b which split out taxable amounts, the amount on Line 3b is the sum of the amount taxed at your ordinary income rate (the ordinary dividends minus the qualified dividends) and the amount taxed at the LTCG rate <which may be zero>?
Yes.
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retiredjg
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by retiredjg »

Sahara wrote: Sun Jun 13, 2021 7:45 am
retiredjg wrote: Sun Jun 13, 2021 6:55 am Donating appreciated shares could be an idea if she is willing to do it and if the church has a way to accept the appreciated shares. If it is a small church, that might not be easy.

https://www.bogleheads.org/wiki/Donatin ... securities

Setting up a donor advised fund might work too, but that depends partially on where the money is actually housed. For example, if the "gal" is at Ameriprise, do they even have a donor advised fund and if yes, what are the fees?

https://www.bogleheads.org/wiki/Donor_advised_fund
Right. I'm going to share this down the line. Since she is not paying taxes on the withdrawals at this point and also addressing some basic personal bookkeeping and budgeting items, I don't want to overload her.
The way you worded that comment made me see your question in a different light.

She will not pay taxes if she donates appreciated shares. But she is not paying taxes on these withdrawals anyway.

So maybe donating the appreciated shares is of no particular value to her (unless she wanted to unload a large amount of her taxable account).
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LilyFleur
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Re: Taxable account with advisor, able to gradually sell and reinvest?

Post by LilyFleur »

retiredjg wrote: Sat Jun 12, 2021 8:54 am
Sahara wrote: Sat Jun 12, 2021 7:14 am How much can she withdraw annually and not pay tax on LTCG?
Here's a start. However, I agree with dbr that this should be estimated using tax software, starting with the 2020 return and comparing to 2021 income if there are no big changes.

She needs to keep her taxable income under $40,400 in order to stay in the 0% LTCG tax bracket. That would be line 15 of the 2020 1040 form. Might be different on the senior form. Adding the standard deduction to that, her total income would need to be under $52,950. These are 2021 numbers.

SSID is $12k taxable (I assume) and ordinary dividends are $8,000. This leaves about $32,950 in space available for tax free long term capital gains if all of the ordinary dividends are non-qualified (which they probably are not). The $1,000 (or $1,500) she is taking from taxable would be part of that $32,950.

One thing to track down is how much of the ordinary dividends are taxable (non-qualified) and how much are qualified. Qualified dividends are taxed like long term capital gains.

About this fund. Columbia Threadneedle's parent company is Ameriprise. It has a front end load and I think there is a high probability it is in an account managed by an Ameriprise advisor who is charging an AUM fee. However, I could be jumping to conclusions - it might be possible she has managed to buy this on the open market with no advisor. I just don't know.

If is is at Ameriprise or similar, you might look for a place (Schwab?) she can transfer and hold this fund with no advisor and no AUM. That would be an improvement. Getting rid of it - all at once or over time - is and even better solution.

It appears that she has enough money as long as expenses do not go up greatly. She will have more if she can get rid of that fund and the advisor I think she is paying. It seems you are attacking the right things - credit card debt first, reduce mortgage second, and considering what to do with those high cost accounts.
Here is a thread that featured Columbia Threadneedle here on Bogleheads as an additional datapoint:
viewtopic.php?t=320096
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